Are Mortgages Cheaper in the U.S.?

As Congress and the White House continue to debate the future of Fannie Mae and Freddie Mac, one of the oft heard concerns is that if we eliminate all the various mortgage subsidies in our system, then the cost of a mortgage will increase. There certainly is a basic logic to that concern. After all, why have subsidies if they don’t lower the price of the subsidized good. Of course some, if not all, of said subsidy could be eaten up by the providers/producers of that good.

All this begs the question, with all the subsidies we have for mortgage finance, are mortgages actually cheaper in the U.S.? While not perfect, one way of answering that question is to look at mortgage rates in other countries. Although every developed country has some sort of government intervention in their mortgage market, almost all have considerably less support then that provided by the U.S. (For a useful comparison of international differences see Michael Lea’s paper).

The European Mortgage Federation regularly collects information on mortgage pricing by EU countries. The latest complete annual data from the EMF’s Hypostat database is for 2009, with at least a decade of historical data.

A quick glance reveals that mortgage rates in most European countries are not all that different than rates in the U.S. For instance in 2009, the U.S. 30 year mortgage rate was, on average, 5.04; whereas mortgages in France averaged 4.6 and those in Germany averaged 4.29. In the UK, the average was 4.34.

Part of this difference is driven by product type. For instance, in France, most mortgages tend to be 15 year, which one would expect to be cheaper than a 30 year. But the French 15 year rate of 4.6 isn’t all that different from the current U.S. 15 year rate of 4.1. As lending rates are usually bench-marked off the rate on government debt, part of the slightly higher rate in some European countries is due to their higher government borrowing rate. If we instead measure mortgage costs as a spread over government funding costs (as reported by the OECD), then many European countries look more affordable than the U.S. For instance, German mortgages price about 100 basis points over long-term German govt debt; whereas U.S. mortgages price about 140 basis points over long-term U.S. government debt.

I don’t expect these numbers to settle the debate. A variety of other costs, such as points paid or required downpayments, differ dramatically across countries. Unfortunately that data does not seem to be readily available. What the preceding comparison does suggest, however, is that even without Fannie and Freddie, U.S. mortgage rates aren’t necessarily going to be a lot higher.